H/t reader M.G.:
“From Bloomberg…..ECB gave Greece a small stipend to keep the insanity going….there is much more to this than meets the eye. Why are they keeping it going?
What are they trying to hide?
There must be an enormous amount of fraud behind the scenes….”
– ECB Gives Greek Banks Smallest Aid Rise Yet Ahead of Summit (Bloomberg, May 20, 2015):
The European Central Bank approved the smallest rise in emergency cash for Greek lenders since tensions re-emerged in February, a sign that deposit outflows may be easing as political talks on the nation’s finances improve. At a meeting in Frankfurt on Wednesday, the Governing Council consented to a 200 million-euro ($222 million) increase in the cap on Emergency Liquidity Assistance to 80.2 billion euros, people familiar with the discussion said. No decision was taken to alter the discounts applied to the collateral pledged for the Bank of Greece loans, the people said, asking not to be named as the matter isn’t public.
With European leaders due to engage with Greek Prime Minister Alexis Tsipras at a meeting in Riga, Latvia, on Thursday, the euro’s monetary guardians are taking their lead from political discussions over the nation’s bailout. While the ECB isn’t giving Greece’s lenders more leeway than it judges they need, officials are aware that tightening the squeeze could worsen the crisis just as talks show signs of progress.
“The ECB keeps Greek banks’ liquidity on a tight leash, leaving a rather constant headroom compared to the amount actually drawn,” analysts at Athens-based Pantelakis Securities wrote in a note to clients today, adding that the small increase may indicate a slowdown in money leaving banks.
The Athens Stock Exchange rose 0.5 percent in early trading. The yield on Greek two-year bonds rose 24 basis points to 22.88 percent as of 11:24 a.m. in Athens.
Exhausting Talks
Spokesmen for the ECB and the Bank of Greece declined to comment on the level of ELA granted.
The total level of aid available has risen by more than 20 billion euros since February, when the ECB locked Greek banks out of regular refinancing operations. The funding is intended to replace outflows at the country’s lenders. Those losses have mounted in recent months as the government’s reluctance to commit to economic reforms blocks international aid payments.
The Greek central bank asked for an increase of 1.1 billion euros in ELA. Before the meeting, some members of the Governing Council took the view that the existing level was sufficient to meet banks’ needs as deposit outflows stabilized in the past week.
The ECB discussion on collateral was long and exhausting, one of the people said. Policy makers review ELA weekly and can restrict it with a two-thirds majority in a vote.
ECB Statement
“The Governing Council discussed the collateral haircut schedule for Greek government-linked assets used as collateral for ELA,” the ECB said in an e-mailed statement. “It will continue to closely monitor the situation.”
European Commission President Jean-Claude Juncker has ruled out a pact being reached at the European Union summit that starts Thursday. German Chancellor Angela Merkel said on Tuesday that Greece has until the end of the month to reach a deal.
Even so, signs of progress in the bailout talks are emerging. Greek Prime Minister Alexis Tsipras will submit a new proposal on sales tax in the coming days after an initial offer didn’t pass creditors’ muster, people familiar with the matter said Tuesday.
Without bailout cash, Greece risks defaulting on its debt. The country won’t be able to make a payment to the International Monetary Fund due June 5 without a deal with its international lenders, the government’s parliamentary speaker was cited by Reuters as saying.
The ECB’s dilemma is that the government’s solvency is linked to that of the country’s banks by the roughly 9 billion euros of treasury bills that Greek lenders hold and regularly roll over.
Cash Crunch
Banks currently have enough collateral to stretch the ELA lifeline to about 95 billion euros under the terms currently allowed by the ECB. At the current rate of increase, that could mean they reach their limit by the end of June.
The crunch might come earlier though, should the Governing Council decide to increase the discounts on the collateral posted by banks in return for ELA. If those so-called haircuts are increased to levels not seen since late last year, the maximum emergency liquidity available would drop to about 88 billion euros.
Easier Haircuts?
That could happen should policy makers decide that easier haircuts introduced at the end of 2014, when Greece’s return to markets seemed within reach, are no longer appropriate. On April 25, Bundesbank President Jens Weidmann said he had doubts about the provision of ELA.
The risk of default may be focusing minds on both sides of the table, a shift that ECB President Mario Draghi and his colleagues are likely to take into account.
“As long as negotiations are ongoing and taking place in good faith, the ECB doesn’t want to be the one pulling the straws,” said James Nixon, an economist at Oxford Economics Ltd. in London. “The ECB will continue to refer to political progress, increase ELA and keep collateral requirements unchanged. As soon as there are signs that political progress is becoming unhinged, the ECB’s stance would change immediately.”